News, Research & Insights for American Homeowners, Patriots & Constitutional Conservatives
Gretchen Morgenson, in Mortgage Unit Troubles Ally Financial explains that:
Although repurchase claimants would be considered general unsecured creditors in a ResCap bankruptcy, the put-back demands would very likely be somewhat senior to those of other unsecured creditors because of their contractual nature.
Gretchen Morgenson, in Mortgage Unit Troubles Ally Financial explains that:
Although repurchase claimants would be considered general unsecured creditors in a ResCap bankruptcy, the put-back demands would very likely be somewhat senior to those of other unsecured creditors because of their contractual nature.
It’s almost been 15 years since Max Gardner and Nye Lavalle met at a conference sponsored by National Consumer Law Center that was held in Colorado, and quickly found themselves viewed as, well… heretics might be the right word. The two became fast friends based on their shared views related to the mortgage servicing industry… and I think both knew that one plus one was about to equal eleven.
Nye was a successful sports marketer and entrepreneur, credited with correctly predicting that Nascar and figure skating would draw huge crowds back in the 1990s, but after being forced to contend with his own mortgage mess, he focused on learning everything about the mortgage industry. As Gretchen Morgenson said in her article about Nye that appeared recently in the New York Times… “In hindsight, the problems he found look like a blueprint of today’s foreclosure crisis.”
It’s hard to imagine two people more tenacious that Nye and Max. Nye became a shareholder in Fannie and stayed on Fannie’s case for two years until finally the GSE hired a DC law firm to investigate his claims. The 147-page report that resulted from that investigation verified that Nye’s suspicions were correct.
Having Nye Lavalle and Max Gardner together is a rare event. Together, they would have to be considered the founding fathers of today’s foreclosure defense movement, so this is an opportunity to learn how it all began and where two of the country’s leading experts see things going from here. Turn up your speakers because it’s time for a very special 2-part Mandelman Matters Podcast… Nye Lavalle & Max Gardner Together in Concert.
Mandelman out.
One might imagine that these days there aren’t too many journalists that I have a whole lot of respect for, or that I find all that interesting, truth be told. I mean, watching the mainstream media ping-pong between the ignore-the-crisis and blame-the-borrower extremes, has changed my views of the media forever, I’d guess. Frankly, if you weren’t courageous enough to go against the grain on something this important… well, I don’t really have a use for you.
And, I know… there have been more showing up as it’s become more popular to do so, but that’s not the same as Gretchen Morgenson of The New York Times. She started writing about the economic meltdown in 2006, which was early… because it was before I started in 2007, which was also early. And she doesn’t write fluff… she’s just flat out really good.
When I read her, I can feel her passion or her honesty, I don’t think she writes what she doesn’t feel, and that’s both great writing and unfortunately rare writing. She’s done a huge amount of excellent work for many years now, even won a Pulitzer in 2002, but she’s a rock star of the economic meltdown and foreclosure crisis, no question about it.
Lately, Gretchen has been really going strong on foreclosure-related topics… the fraudulent document scandal, the Fannie report, DocX, the AG settlement, so I thought now would be a good time to have her on a Mandelman Matters Podcast. We had been planning to do it for a while, but I kept blowing it… she’d send me an email that would say, “How about this Tuesday,” or whatever, and I wouldn’t find it in my inbox until Thursday… stuff like that.
(I really do have to do something about my email situation… LOL.)
Anyway, she knew I really wanted to do it, so she set aside time on Saturday morning, right before she left for a week’s vacation on the slopes… and that makes her the nicest person on the planet, on top of being every other wonderful thing she clearly is. So, turn up those speakers, sit back and relax and listen to Gretchen Morgenson of The New York Times, as we talk about her book, “Reckless Endangerment,” the scandals, the settlement… and more on a Mandelman Matters Podcast.
In the latter part of last year, the book that she and Josh Rosner co-authored, “Reckless Endangerment,” was released and even though I was in the middle of reading several others at the time, I rushed right down to buy it as soon as it arrived in stores. I didn’t read it right away,… I was in the middle of two or three at the time, as I said and so I flipped through it and went back to whatever I was doing.
To be entirely candid, it looked a little GSE heavy to me, so I didn’t even crack the book until Christmas came around and I had the time to devote to it that it deserved. Besides, by then I had started getting more suspicious that Fannie and Freddie were responsible for more of the problems than I had previously thought.
So, all I can tell you is… GET IT. You’ll like it a lot, and it’s not an intimidating read in the least. Plus, it fills in some blanks that you won’t find in any of the other books that are now displayed on the “meltdown” table at my Barnes & Noble.
Mandelman out.
Michael Olenick, Gretchen Morgenson, and Yves Smith have all written pretty damning things about the foreclosure reviews persuant to the OCC consent orders with major mortgage servicers. (For my own previous thoughts, see here and here.) I've just started to peruse some of the engagement letters with the firms conducting the reviews, and the rot is even worse that these other critics portray.
What follows is in no way a comprehensive cataloging of the problems in the OCC foreclosure review process--this is just what I spotted from the briefest of perusals. Yet it is clear that there are two types of serious problems: conflicts of interest and flawed substance of the review process. I'll lay both out below and then give some thoughts as to what could and should be done to remedy this farcical process in order to ensure some accountability to the public and justice for homeowners. The post concludes with some thoughts about the core problem--the OCC--and what can be done to remedy it.
Conflicts of Interest(1) The Allonhill letter has seemingly strict conflict of interest rules. But then it grants various conflicts-of-interest exceptions to Allonhill. What's more ridiculous is that it's all being done on the honor system. That just doesn't work with conflicts of interest.
(2) There's a lot of subcontracting mentioned in these opinion letters. That alone raises all kinds of other conflicts issues. For example, Promontory Financial Group is subcontracting to Allonhill for the Wells Fargo review, even as Allonhill is doing its own review for Aurora. There's nothing wrong with subcontracting, but that raises a whole set of further unanswered questions.
(3) There's also engagement of law firms as part of the reviews. This is really problematic. The law firms seem to be engaged in two ways: first, to provide general counsel, and second to provide opinions on what state law was at the time of the foreclosures. The general engagements seem to be going to law firms with serious conflicts of interest in the issue, as they are major securitization firms. The most glaring example is SNR Denton, which is engaged by Allonhill. SNR Denton was involved in the securitization of the mortgages and probably has opinion letter liability on the securitizations. It has also made clear that it thinks there is "nothing to see here folks" on the chain of title issue, and that it thinks Ibanez was a radical and wrong outlier decision. SNR Denton has also represented the American Securitization Forum. Hardly neutral counsel.
A similar problem exists for McDermott Will & Emery--it's representing BoA in a foreclosure-related class action and representing PNC here. Not a per se conflict, but come on--it's the same damn issue. You can't be arguing that there's no problem in one forum and then be overseeing a neutral review in another.
And then there's Hudson Cook, a pocket firm for the financial services industry, which is providing opinions on what state law was at the time of the foreclosures. Any doubts what they'll be opining? I suspect that this is just the surface of all of this.
(4) Many of the conflicts provisions (in Wells and BoA letters, e.g.) are redacted. The OCC has made these letters available so that the public can evaluate them. But how can we if the information is all redacted? How can we possibly tell if there is a serious conflict or not?
(5) For Allonhill, the indemnification and liability limitations terms on pp. 28-30 are redacted. Those are pretty key terms for determining Allonhill's independence.
Review Methodology
(1) It's clear that none of the reviews will look at PSAs and trust law. The OCC doesn't want anyone looking at this issue. It's OK if the reviews find some SCRA violations and the banks pay a few dollars here and there. But the chain of title issues are too sensitive and OCC has made them a no-go.
(2) The review is based on the assumption that the note is a negotiable instrument. (See p. 29 of Appendix A to Allonhill.) But they aren't. The prepayment notification provision in the stanard Fannie/Freddie note is an additional undertaking that makes a note non-negotiable under UCC 3-104. In other words, it's just a regular contract, albeit one governed by UCC Article 9 for its transfer. That makes the evidentiary burden for foreclosure MUCH higher. It also means that there is no Holder in Due Course status possible; there's assignee liability, which is the basic rule of contract law. So there's an incorrect fundamental assumption in the reviews.
(3) The reviews are based on pre-2010 state law. On the one hand, this makes sense--that was the law at the time of the foreclosures. But pretty no state had addressed any of the current foreclosure issues head-on before 2011. There wasn't definitive law in most cases. And that makes it easy to say "no problem." Had these cases been litigated, there might well have been a different result, but that's not what the review will do.
(4)Check out the assumptions and exceptions on pp. 13-16 in the JPMorgan-Deloitte letter. Some are kind of heroic, like that there was proper service. I testified about a "sewer service" problem before the House and Senate in November 2011. It's not a non-issue. Or how about that notarizations took place on the date claimed. We know that isn't always the case--that's what started the whole robosigning scandal.
Other assumptions are strange. The review will only consider 2 federal statutes and state statutes, not local mediation requirements, etc. Sure, it makes the reviews easier. But those requirements are the law too. You can't pick and choose which parts of the law to comply with.
(5) Other ridiculous points--Allonhill will rely on Lexis/Nexis for bankruptcy information. Who knows just how accurate that is? There's no need to find out--why the heck not use the official on-line court docket system? Oh, they might have to pay the courts for doing so...
It's been apparent from day one that the OCC consent orders and review process were going to be a charade. Yes, an expensive charade, but still a charade, and a far cheaper one than real justice would require. Now, you might reasonably object that the standard I am demanding is unreasonably high and that the burden of doing serious borrower-by-borrower examinations of foreclosures is not worth the candle. I agree. The solution to the foreclosure fraud problem cannot be individualized reviews. It's just too cumbersome, is likely to go off the rails at too many points, and creates tremendous cost for little benefit. That's why we need a comprehensive global settlement of the entire mortgage crisis. That's why the OCC and other bank regulators doing separate consent orders was so damaging--they undermined the prospects of a more workable settlement. It's not realisitic to expect perfect justice here. But we need a lot more justice and we need a process that gives the homeowner a limited no-contest amount of compensation, with the bank and the homeowner both permitted to challenge it to seek lower or higher payouts (in most cases they won't bother, but it protects against egregious injustice).
But that's not where we are, or in DC-dialect, where we're at. We're stuck dealing with a sham review process as part of Potemkin consent orders. It's still possible to salvage something. At the very least, we should have some transparency in the process. The OCC should report to the public for each servicer (and naming names), how many errors were found, what types, affecting how many borrowers, how many were considered to have caused financial harm, and what compensation was offered. The OCC should also prohibit the banks from extracting any releases from borrowers as part of the compensation. Ideally, there would also be a cross-check imposed on the process. The gold standard for integrity here would be constituting a truly independent Team B to conduct its own review of randomly selected files and cross-checking the Team B results against those found by the consulting firms. The cost of doing so would be quite small (I know a lot of people who would do this for free). The public is owed transparency and accountability in this process; I hope that Congress continues to keep the heat on the OCC to try and salvage something from this farce.
The real problem here is not the particulars of the foreclosure reviews, but the OCC itself. The OCC has repeatedly shown itself to be a failed regulator. It regulates for the industry, rather than regulating the industry. It's not clear to me why the OCC, but not OTS, escaped the axe in Dodd-Frank. But then, the problem really wouldn't be solved just by abolishing the OCC. The root of the capture problem here is that the OCC's budget is paid by the banks. I don't know about you, but when I pay for a hotel, I expect service. So do the banks. And service they get. The OCC waged an all-out war against state attempts to reign in predatory lending practices in financial services, it coddled the credit card industry for years, it permitted its banks' subsidiaries to engage in abusive mortgage lending and securitization, and it continues to turn a blind eye to payday-type lending by major banks. And those are just the highlight from the indictment against this failed regulator. We should probably only have a single federal prudential bank regulator (with the insurance fund kept separate), but let's get to the heart of the issue--bank regulators that regulate for banks, not for the public's welfare.
If we want the OCC to start listening to the public, not just the banks, we need the OCC to be subjected to appropriations. (But Adam, how can you then say the CFPB shouldn't be subject to appropriations? Aren't you speaking out of both sides of your mouth? No. The CFPB is different. The CFPB isn't getting its money by signing up banks for its stable. It gets a share of the Fed's operating budget, most of which doesn't come from the banks. That means the CFPB is insulated from capture in this form and from political interference. To make this model work for the OCC is possible, but there'd still be a serious legacy problem with personnel, especially at the top level.)
There are definitely problems that would come from putting the OCC under appropriations--I don't relish the thought of politicized bank regulation. But the choice isn't between politicized bank regulation and perfect bank regulation. Instead, the choice is between politicized bank regulation and captured bank regulation. And I'd take the former 7 times a week and twice on Sundays. Politicized bank regulation wouldn't necessarily mean wild see-saws. Instead, I might keep the OCC in check and moderate because the OCC would know that there's an election every two years, so it had best not get out of hand either way.
Whatever happens with the foreclosure reviews, I think it's important to keep the larger problem in sight: something will eventually have to be done about the OCC if banks are to be subject to the law in the United States. This is not just a problem of consumer protection. That's today's flavor. It's also a problem of systemic risk. When the banks call the shots on enforcement, no amount of Dodd-Franking can provide protection against future crises.
The NY Times had some details today about the multi-state attorney general mortgage servicing settlement in the works. It looks every bit as awful as one might have feared. Here's the criticial take-away: this is bupkis. It gives meaningless relief to a meaningless number of randomly or adversely selected homeowners. It doesn't do justice, even by halves.
First, though, there's a detail reported in Gretchen Morgenson's otherwise insightful piece that I have on good source is incorrect. The piece states that the banks would be doing principal write-downs on loans they own or service. That's gotta be incorrect. The banks can do principal write-downs only on loans that they own. They have no legal authority to pledge write-downs on loans that they service on behalf of investors. (Remember the Greenwich Financial suit against Countrywide for doing just that?)
There's a critical implication here, then about the scope of the multi-state settlement: at best 20% of the population of underwater mortgagees will be helped by this settlement, say 2.2 million homeowners. The other 8.8 million (and probably 10 million by my reckoning) are SOL. How do you think they're going to feel about their AGs? About their President? Too many times have American homeowners been promised help without receiving any. It's getting old.
That 20% isn't the 20% who are deserving in any particular way. They are just the 20% who were lucky enough that their loans weren't securitized for whatever reason. And it's a 20% that likely includes lots of jumbo loans--people who borrowed more--while those who borrowed less won't get help. Countrywide kept lots of payment-option ARMs on its books. Are those the homeowners who are the most deserving?
It's doubtful, however, that it's even 20% because that 20% figure includes lots of loans on the books of small banks that aren't part of the settlement. It also includes a large number of 2d liens. My best estimate is that less than 10% of mortgagees are actually eligible to be helped by the settlement. Congratulations on winning the lottery! There's justice for you.
Let's pretend, for a moment, that all $25 billion in the settlement would go to principal reductions. How much does this buy? Very little. Remember that there's $700B in negative equity in the US spread out over 11 million homeowners. So at best this comes out to $2,272 in principal reduction relief per homeowner. Compare that with the average $65,000 in negative equity per homeowner and this is just bupkis. And that's not even considering the states with deeper negative equity on average: California, Nevada, Florida, Arizona, etc. In California negative equity averages $93,000. $2,722 eats away less than 3% of that.
OK, you say, maybe this help is concentrated on 10% of the mortgagees, as you say. In that case it's $27,222 a head. That's something, isn't it? Well, consider a homeowner with a $135,000 home with a $200,000 mortgage on it. Even if that homeowner gets $27,222 in principal reduction, she still owes $172,778 on the home. That means LTV has gone from 148% to 128%. An improvement, no doubt, but not at all a meaningful one. The homeowner remains deeply underwater. Unless the principal reduction puts the homeowner in positive or near positive equity (say 105% LTV max), it ain't gonna matter. It's just an accounting gimmick. So even in the best case scenario, the relief contemplated by the multi-state settlement is meaningless help to a meaningless number of random or even adversely selected people. Is this really the best that the AGs in the multi-state deal could do?
There's something really important to note here: the banks have shown that they are willing to settle on a way that includes principal reductions. That shouldn't be a surprise--they've done that before, such as the mini-settlements that Massachusetts has done with Goldman and Morgan Stanley or that New York's Banking Superintendent did with Goldman. So if this is a matter of dollars, not principles, why on earth are the AGs in the multi-state settlement going to cut a deal for $25B? This is pocket change for the defendants and doesn't come anywhere close to rectifying the harm they wreaked on the economy, preventing future foreclosures, or pushing a measure of accountability for the financial crisis.
Final point about this travesty: it has implications about the 2012 Presidential election. Remember that it's not just a bunch of AGs at the table here. It's also the Obama Administration. And therein lies the problem. Up to this point the Romney and Geithner foreclosure plans have been identical. Romney's plan is to clear the market by foreclosing on everyone fast as possible, while the Geithner plan is to get out of the way (or look the other way) while the banks do their thing. On housing policy, I really can't distinguish Romney and Geithner in any meaningful way on substance. This plan doesn't do anything to change that.
There exists in this country today a pervasive form of lawlessness that manifests itself in most foreclosure cases and may be seen in virtually every mortgage contract that exists across the country. We don’t know exactly how bad things are because the banks are pushing back so hard, suppressing information, filing Motions for Protective Orders. Our elected and appointed leaders are meeting in secret with the banks and they are keeping the results of their investigations very close to the chest….I am certain they are being told, and they believe, that if the information they are uncovering “gets out” all hell will break loose. The masters and minions of the machine fail to realize that they cannot keep the lid on all this forever….the information is all there. The false affidavits, the forged assignments, the MERS mockery of our stable real property records. The records cannot be destroyed and they cannot avoid forever the consequences and the harm caused by their extra-legal sorcery.
After reading Gretchen Morgenson’s article in the New York Times which details the lengths the banks are going to in order to suppress the investigations of the United States Trustees and considering all of the clashes between the banks and our government institutions on one hand and the rights of the people on the other hand, I went back again to what has become a very important book for me, Hernando De Soto’s The Mystery of Capital. This book has been out for many years. It was written as more or less a guide book to developing countries, the basic premise is that the primary explanation for the success of the United States was the system of real property ownership that was developed in the early 1800′s. Prior to building the United States’ system of open and public records of the private ownership of land, no other nation gave her people the ability to tap into the land’s value and resources. There are numerous side benefits to all of this. This ownership gave heretofore poor people with no stake in their own future or the future of the land a real stake in the future of both. They owned the land and their potential was only limited by how hard they would work so they worked more and produced more than any people ever had. They were tied to their land now. There were geographic handcuffs which planted people in communities for generations so a far more stable society was developed with business and personal relationships grounded in the dirt that were respected…and with that developed more respectful and cooperative business relationships….you were going to be dealing with your neighbors for generations to come.
The reason why all this not so distant history is important is because it has all been destroyed in a very short period of time here in the United States, first with the Serpent of Securitization, then with the MERS Monster, and then the toxic title stew that they moved into our courts and into our heretofore stable and clear public land title system.
The court decisions that are being released across the country are a crazy quilt of fits and starts, some decisions reject important elements, others approve those elements, some federal courts affirming the toxic titles and procedures, others outright rejecting them. It seems more and more the decisions are opposed to the Wall Streeters, the MERS Monster and the Securitization Serpent, but there is not uniformity and it is causing real mess. Which brings us to the period 1797 to 1820 in the good ole US. The land was wild and free. There were no prior private titles to the vast patches of lands that were being homesteaded and farmed by our rough and tumble forefathers. Hell, the boundary lines between the states were not even clear. Congress was busy trying to clearly define the boudaries of the states, while at the same time the farmers and mainstreeters were trying to define the boudaries of their own lands.
While the founding fathers in their fancy tights and funny white wigs get all the credit, the dirt crusted homesteaders, farmers and squatters were the most important figures in the development of this country. They were the ones that got up before dawn, cleared the land and worked the fields 26 hours a day 395 days a year every day of their waking lives. No welfare here, no unemployment benefits, these American Heroes built this country one dirty, dusty row of corn at a time. Now a problem with all their effort was they largely had no formal legal title to the land they were taming. But through a variety of both legal and extra-legal means, they staked out their patch of virgin land, cleared it, fought it, wrested it and finally caressed “their” land until it was producing the corn, wheat, cotton that served as the economic lifeblood and the foundation upon which our greatness was built.
Formal and informal tradition developed that permitted these heroes to claim ownership of the land and formalize their claim on the land based on their effort. The formal recognition of these traditions became the squatters rights or laws of adverse possession that still exist on the law books today. These laws and traditions were widely respected across the many states and became formalized into various state laws. Conflicts were common and in 1821, the United States Supreme Court declared Kentucky’s occupancy laws unconstitutional in the decision Green v. Biddle. The decision was widely viewed as a crushing defeat for the common people and a gift and recognition of the political power of the rich and largely absentee landowners…many of whom professed some sort of claim to the title of vast tracts of land that they did absolutely nothing with.
Green v. Biddle was an incredibly unpopular decision with the masses, the real people and the elected leaders of many states began to take note of the rising political importance of the farmers, the homesteaders, the little people. The politicians began to view the scrappy homesteaders not as interlopers, but as figures far more powerful and important than the elites, the bankers and the absentee landowners. These homesteaders began to organize, the politicians began to align with them and they all forged ahead to overturn the “treacherous conduct” of the United States Supreme Court.
In relatively short order states all across the country and even Congress passed laws and took other action to push back against the banks. Between 1834 and 1856 the push back was pervasive that some considered the Green v. Biddle the most opposed decision yet issued by the Supreme Court, which became effectively overturned by state and even federal legislation.
So what’s the impact on the treacherous conduct we find our country faced with today? The parallels are simple. Our courts, especially in the State of Florida were sold a siren song by the banking industry and the legislatures. Their message was simple, ignore all our mistakes, our fraud, our crimes our abuses of the voters and the people. We make the money, we own the money, we own all of you and we own this country. Ignore your pesky property laws, disregard all your damn court rules of evidence and procedure and principles of fairness and integrity and equal treatment. Your Constitutions mean nothing and Due Process has no place when you’re dealing with us and our contracts. Our Pooling and Servicing Agreements our Assignments, our corporate policies and procedures supersede your Constitutions and your Due Process. Now get back in your courtrooms and throw these squatters, these settlers, these claimants off the land….DO IT NOW!
You still hear quite a bit of this now from the corporate mouthpieces and from the handful of bought and paid for elected officials….they recite the mantra that we must get through all this, whatever it takes in order to get this economy moving again. But all of those pronouncements fly in the face of reality and are disputed by 5th grade economics. The American people have already thrown bajillions of dollars at the banks and they in turn have thrown countless millions of people into the streets….and what good has it done any of us? Well, it’s done the banks a helluva lot of good. Massive, obscene profits, screw you and not even so much as a thank you very much.
But this has got to change. The American people are waking up. That great sleeping dog that is the American voter is starting to rise after being kicked repeatedly. And here and there in statehouses across this country a few bright bulbs are starting to flicker….they’re starting to recognize the shift away from the banks and their big fat campaign checks. Why heck, there might even be one, maybe two elected officials who might just start to view those bank campaign checks as a bit toxic….maybe after Iowa AG Tom Miller’s recent attention for taking blood money from the serpents, other AGs will think twice about courting payoffs from the Wall Street serpents.
The tide may be turning, but it is up to everyone of us to continue to keep the drums beating. Press the press. Share these stories with every friend and colleague in your network. Use social media and your own contacts.
There are many dark days ahead, but if we do not beat back these bank advances, all hope for this country is lost. Remember that. If we allow these abuses and advances to continue our nation is lost.
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We are all getting screwed, sold up the river by the Attorneys General who have crafted a settlement agreement with the criminal corporations that are abusing our country and courts. That we are all being abused is now universally understood and is being consistently reported on. You can’t get more coverage than the New York Times after all. So what will come of the outrage that’s being squarely reported on? Probably nothing. But the reporting will be advance warning to all of us that things will get worse and that the corporations own us all….
From the New York Times:
We were worried recently when we saw an advance draft of legal agreements between federal regulators and the nation’s big banks to address and correct foreclosure abuses. The actual deals were as bad as we feared.
And more analysis in a front page article that appeared in the New York Times:
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From Insult to Injury… and then back to Insult once again… followed by more Injury… but then returning to Insult… only to be tossed right back into Injury… before heading straight for Insult…
Gretchen Morgenson of The New York Times has reported that taxpayers have paid $160 million SO FAR in legal fees to DEFEND the top executives at Fannie Mae and Freddie Mac, and the long-since-bankrupt mortgage giants themselves since the government nationalized them… no, that’s not right… since the government placed them in “conservatorship,” yeah, that’s it… in September of 2008.
Now, don’t get confused here… we’re not talking about the $150 BILLION that taxpayers have paid since the government took them over in September of 2008 to bail out the two towering tributes to incomprehensible avarice, lethargy, and incompetence. Looking at these two organizations, now referred to as the “GOEs,” for Government Owned Enterprises, is like watching all seven deadly sins being committed at once.
So, we the taxpayers have spent $160 Million DEFENDING them? Defending them? Gretchen… I think you must have a typo there, right? Shouldn’t the question be, how much are we spending to PROSECUTE them? I mean, if the government is paying to defend them, who pays to PROSECUTE them?
Oh no, I think I know the answer to that question… allow me to venture a guess… WE DO? We the taxpayers pay to both DEFEND AND PROSECUTE them? And as it says in Gretchen’s story:
“The legal payments show no sign of abating.”
Of course they don’t… we’re paying both sides of them.
Oh, well then… very good then. All I can think to say to that is that I sure hope our lawyers kick our ass in court!
The thing about the Times story, in my mind anyway, was not just how much we’re spending to defend these white collar criminals… no, what gave me pause was that in the very first paragraph of the story it said:
“The cost was a closely guarded secret until last week, when the companies and their regulator produced an accounting at the request of Congress.”
Now, the FHFA… or Federal Housing Finance Administration… is the conservator for the two GOEs now, so how could anything be a “secret,” let alone a “closely guarded” one? I mean… hang on… what does “federal” mean anyway? Is it like the federal in “Federal Express,” or does the first ‘F’ in FHFA actually mean the agency is part of the federal government?
And get this… in 2006, the Office of Federal Housing Enterprise Oversight… or, I suppose the wonky acronym would be OFHEO… sued the three top executives at Fannie…
“… accusing Fannie’s top executives of taking actions to manipulate profits and generate $115 million in improper bonuses.”
And Mr. Raines, who ran Fannie Mae for some years and resigned in December of 2004, without admitting any guilt, it should go without saying, actually paid back $24.7 million to settle the suit. He paid $24.7 million? He wrote a check for almost $25 million bucks? And now WE THE TAXPAYERS are paying to DEFEND him… because we’re also paying to PROSECUTE him?
And why in the world would a guy who ran a government agency… GSE… even have $25 million… because then one day he was shooting at some food and up through the ground came a bubbling crude? How much do you have to pay a guy to run a mortgage company who only says “YES” all the time?
Oh well… I guess when it Raines, it pours… LMAO… I’m funny…
Look, I don’t know all that much about mortgages, but I’m here to say that I’m absolutely certain that I could have run Fannie Mae into the ground for a lot less than Raines needed to do it… I could have killed that company for no more than a trill… swear to God, I could. Just in case another opportunity like that comes up… throw my name into the hat, would you please? Tell you what… I could have probably bankrupted Fannie for no more than half a trill, how’s that… would that be something the country might be interested in at some point, because I’m a patriot and if I could help save the country that kind of money, I’d be more than happy to… really. And I wouldn’t even need my own plane… I’d do it and fly commercial… there, I said it.
And then the Times story went on to say:
“If the former executives are found liable, they would be obligated to repay the government. But lawyers familiar with such disputes said it would be difficult to get individuals to repay sums as large as these. Lawyers for Mr. Raines, for example, have received almost $38 million so far, while Ms. Spencer’s bills exceed $31 million.
These individuals could bring further litigation to avoid repaying this money, legal specialists said.”
Oh yeah, and who would pay those legal bills… the ones to go after us so that the executives wouldn’t have to repay us for having paid for defending them against us… I think. And would that be Us paying those legal fees too?
STOP IT, DAMN IT… STOP IT… YOU’RE HURTING ME!
And in closing, the Times story quoted Mr. Edward DeMarco, who is the acting director of the FHFA, saying:
“I understand the frustration regarding the advancement of certain legal fees associated with ongoing litigation involving Fannie Mae and certain former employees.”
Well, that’s clearly not true. I don’t think he understands that frustration at all, do you? He approved paying out $160 million to defend the indefensible and then kept it a closely guarded secret until Congress forced him to disclose the amounts? And he understands the frustration?
Oh no he doesn’t.
Mandelman out.
But what about this? Now, if I could only find that damn rabbit hole I must have slid down…
EDITOR’S NOTE: I don’t know Brad Miller bradmiller.house.gov but I’m sending him a donation. Gretchen Morgenson says he’s worth getting to know and I am going to do just that.
He’s running for re-election in North Carolina, and except for a scant few other members of Congress, he is one of the few that has actually studied the issues confronting 20 million homes and the resulting impact on the economy. What really distinguishes him is that he has something that virtually nobody else in politics has — an idea. It’s hard to imagine someone in politics who actually wants to do something rather than just say something. It’s even harder to imagine that there is someone already in Congress that “gets it” and is taking on the tyrannical control of the big banks in Washington, D.C.. Yet there he is.
If we as a group support Brad Miller, give him the money he needs to campaign properly, and if we can ferret out some other people like him, things might actually change — not just in Washington, but at our dinner tables. Like Alan Grayson www.congressmanwithguts.com in Florida, one man, getting national attention can change the dialogue, change the national perception of an issue being twisted by vested interests and help create at least a first step toward resolution that is fair, equitable and realistic.
This article identifies only one of many conflicts of interests that the large servicers have. This one is about keeping you paying the second mortgage and deluding you into letting the first mortgage slip into default. There is a reason for this behavior — a self-serving reason that runs counter to the interests of the homeowner, the investors who advanced money for the loans, the taxpayers, and everyone else who is affected by unemployment and stagnation in our national economy). The reason is that the servicers are out for themselves and the “trustees are letting them do it because all they care about is getting their monthly fee.
Elimination or strict regulation of the servicing infrastructure would eliminate or mitigate the foreclosure epidemic. Brad Miller has identified that fact with clarity. As a member of congress he is representing you wherever you are and whatever your political affiliation. If you are sick of the bank bailouts, sick of the factual constipation caused by the banks and all those elected and appointed officials who are paid to do the bidding of the banks, then start voting like it.
Personally I have little in common with the tea party movement that consists mostly of people who voted for Bush and the republicans who created and enhanced this mess to unimaginable proportions — and then handed it over to the democrats with a smirk. But I have one thing in common with them — if the candidate is not very convincing that they intend to actually DO something rather than TALK about it, then the “candidate” is not running for office they are marketing for a lucrative job. Fire them, regardless of party affiliation unless they really convince you they know what they are talking about and can articulate specific proposals to fix the problems we face.
MEET Brad Miller, a Democratic representative from North Carolina who was elected to Congress in 2002, talks straight and understands how big banks can put consumers at peril.
He is worth getting to know, not only because of his deep concern about the foreclosure epidemic, but also because he has made a compelling recommendation to level an exceedingly tilted playing field in mortgage finance.
Depending upon your perspective, Mr. Miller is either the right man in the right place on Capitol Hill — if you’re a consumer — or a threat to the status quo.
A lawyer who worked on consumer protection issues in North Carolina, Mr. Miller is not new to battling banks. In March 2009, along with Representative William D. Delahunt, a Democrat from Massachusetts, he proposed the creation of an independent consumer agency; it became a part of the recent financial overhaul. This past March, Mr. Miller introduced a bill that would eliminate one of the most pernicious conflicts of interest in banking today: the dueling roles played by the big mortgage servicers.
These companies — the biggest are Bank of America, JPMorgan Chase, Wells Fargo and Citibank — operate as the back office for the mortgage lending industry. In good times, their tasks are fairly simple: they take in monthly mortgage payments and distribute them to whoever owns the loans. In many cases, large institutions like pension funds or mutual funds own the mortgages, and servicers are obligated to act in their interests at all times.
When borrowers are defaulting in droves, as they are now, loan servicing becomes much more complex and laborious. Servicers must chase delinquent borrowers for payments and otherwise manage these uneasy relationships, possibly into foreclosure.
So where does the conflict of interest lie? Often, the same bank that services a primary mortgage owned by another institution also owns a second mortgage or home equity line of credit on the same property. When that borrower has trouble meeting both payments, the servicer has an interest in making sure that amounts owed on the second lien, which it owns, continue to be paid even if the first loan, which it has no interest in, slides into delinquency. About two-thirds of primary mortgages are serviced by banks who do not own them but hold the accompanying seconds.
This conflict is a crucial reason that the government’s loan modification program has been so woefully ineffective. The Treasury Department never forced the second-lien holders who service troubled primary mortgages to reduce the amount they are owed by borrowers, even though such a move would give them a better shot at keeping their homes.
Of course, the big banks that hold these second liens have little interest in letting borrowers write them off entirely, or in part, because the institutions would have to absorb huge losses on them. As long as the borrower is eking out payments on the second liens, the banks that own them can pretend that they are performing and keep recording them at high values on their books.
The top four banks hold approximately $450 billion in second liens that are supposed to take a backseat to the investors who hold the primary mortgages. But because of the front-seat role big banks play as servicers, they are in a position to put their interests first.
“Unless we can make servicers modify mortgages through bankruptcy or eminent domain, the servicers are not going to reduce principle,” Mr. Miller, 57, said in a recent interview. “Their stance does seem largely driven by accounting concerns — they are trying to maintain the fiction that the mortgages are worth the value they are carrying them at on their books.”
Enter Mr. Miller’s bill, the Mortgage Servicing Conflict of Interest Elimination Act. It bars servicers of first loans they do not own from holding any other mortgages on the same property.
Mr. Miller’s bill has not gained much attention since it was introduced in March. But it ought to, because the Dodd-Frank financial overhaul law is utterly silent on servicer conflicts.
The bill would give these institutions a reasonable amount of time to divest either their servicing businesses or their interests in home mortgages, Mr. Miller said. A likely outcome is that the four biggest banks would spin off their mortgage servicing operations. This would not only resolve the conflict between loan servicers and investors, but it would also result in smaller, less complex banks, he said. That is surely a major benefit.
Another is that Mr. Miller’s law, if enacted, would break up the logjam now thwarting mortgage modifications. “We must reinvent our mortgage finance system,” he said. “This is a huge part of our economy, and we cannot have a healthy recovery with the housing sector as sick as it is.”
A member of the House Financial Services Committee, Mr. Miller concedes that he did not see the financial crisis coming. But he said that several years ago he became aware that increasingly poisonous mortgages were being peddled to consumers.
“These mortgages were not designed to increase homeownership; they were designed to trap people in debt and strip the equity in their home as home prices appreciated,” Mr. Miller said. “For the financial industry, that increasing wealth from middle-class homeowners was an attractive target; if they could trap families in a cycle of borrowing every three years or so, then a lot of increased wealth in their homes would end up in the financial sector rather than with those families.”
Mr. Miller recognizes that his is an uphill climb because the big banks have many friends in high places across Washington. “Americans have come away from this persuaded that everything has been done to help the banks and not to help them,” he said. “And in a democracy, that’s a real problem.”
Still, he said he has recently noted a slight shift in the balance of power. “I’ve seen the banks going from losing no fights to losing a few fights,” he said. “What I’ve found is the more fights we pick, the more success we have.”
Here’s to more fights, then. Many more.
From Gretchen Morgenson, NY Times Today. 06denver.html?dbk=&pagewanted=printEditor’s Note: OKAY so let’s say you are ideologically of the position that anyone who signed a bum deal to finance their house should suffer the consequences. You signed the note, didn’t you? You borrowed the money, didn’t you? Why should you get any relief when the guy down the block played by the rules and doesn’t get any relief. Blah blah blah.
So fast forward to that guy down the block, in fact that city he lives in. And he finds out that the same deals that caused this ridiculous financial crisis where Wall Street ran off with all the money not only got the little guy, but his own city, which is going to make his taxes rise, services decline and cause a mess in his city and county for decades to come. How now, brown cow?And fast forward to the mid sized and small companies that got sucked into the same exotic deals believing that these experts from Wall Street knew more than they did and that even if they didn’t understand the deal, it had the stamp of approval from JP Morgan Chase, so it must be good. They wouldn’t do anything bad would they?This fight isn’t over. As government becomes aware that their own finances have been turned upside down by these follies, as companies become aware that their own pension and operating accounts are being hit by these tactics, the chorus of people signing from the same hymn book on the same page will grow.
In the spring of 2008, the Denver public school system needed to plug a $400 million hole in its pension fund. Bankers at JPMorgan Chase offered what seemed to be a perfect solution.
The bankers said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs — money that could be plowed back into Denver’s classrooms, starved in recent years for funds.
To members of the Denver Board of Education, it sounded ideal. It was complex, involving several different financial institutions and transactions. But Michael F. Bennet, now a United States senator from Colorado who was superintendent of the school system at the time, and Thomas Boasberg, then the system’s chief operating officer, persuaded the seven-person board of the deal’s advantages, according to interviews with its members.
Rather than issue a plain-vanilla bond with a fixed interest rate, Denver followed its bankers’ suggestions and issued so-called pension certificates with a derivative attached; the debt carried a lower rate but it could also fluctuate if economic conditions changed.
The Denver schools essentially made the same choice some homeowners make: opting for a variable-rate mortgage that offered lower monthly payments, with the risk that they could rise, instead of a conventional, fixed-rate mortgage that offered larger, but unchanging, monthly payments.
The Denver school board unanimously approved the JPMorgan deal and it closed in April 2008, just weeks after a major investment bank, Bear Stearns, failed. In short order, the transaction went awry because of stress in the credit markets, problems with the bond insurer and plummeting interest rates.
Since it struck the deal, the school system has paid $115 million in interest and other fees, at least $25 million more than it originally anticipated.
To avoid mounting expenses, the Denver schools are looking to renegotiate the deal. But to unwind it all, the schools would have to pay the banks $81 million in termination fees, or about 19 percent of its $420 million payroll.
John MacPherson, a former interim executive director of the Denver Public Schools Retirement System, predicts that the 2008 deal will generate big costs to the school system down the road. “There is no happy ending to this,” Mr. MacPherson said. “Hindsight being 20-20, the pension certificates issuance is something that should never have happened.”
A spokesman at JPMorgan, which led the Denver deal, declined to comment. Royal Bank of Canada, which acted as the school system’s independent adviser even though it participated in the debt transaction, declined to comment. Denver school officials said that they had agreed to sign a conflict waiver with Royal Bank of Canada.
Denver isn’t the only city confronted with budgetary woes aggravated by esoteric financial deals that Wall Street peddled in the years before the credit crisis. Banks have said the deals were appropriate for the issuers and that no one could have predicted the broad financial collapse that put pressure on the transactions.
Still, some municipalities have found such arguments wanting and are pushing back.
Last March, the Los Angeles City Council told its treasurer and city administrative officer to renegotiate interest-rate deals the city had used to try to lower its debt payments with the banks that sold them. “If they are unwilling to renegotiate, then those financial institutions should be excluded from any future business with the City of Los Angeles,” noted a report by the City Council.
In Pennsylvania, some school districts have unwound interest-rate deals, and the state’s auditor general, Jack Wagner, has urged other issuers to follow suit. “For the sake of Pennsylvania taxpayers, I call on the other school districts that have entered into similar swaps contracts to get out of these risky agreements as soon as they possibly can,” he said in a statement in February.
Financial stress from these deals could not come at a worse time for cities, towns and school districts already saddled with high costs and falling revenue. Although it is difficult to tally how many public entities entered into interest-reduction deals, a recent analysis by the Service Employees International Union estimated that over the last two years, state and local governments have paid banks that arranged these transactions $28 billion to get out of the deals, seeking to avoid further crushing payments.
Many transactions remain on public issuers’ books. S.E.I.U. estimates that New Jersey would have to pay $536 million to get out of its derivatives contracts, while California faces $234 million in such payments. Chicago is looking at $442 million in termination fees to unwind its transactions, and Philadelphia would have to pay $332 million.
Both Mr. Bennet, whom the White House has praised for his innovative approach to education, and Mr. Boasberg defend the deal they recommended in Denver back in 2008. They say that it has saved the school district $20 million it would have otherwise had to pay to cover the pension shortfall, and they maintain that no one could have predicted the credit crisis of 2008 that elevated the deal’s costs.
But the savings cited by the two men do not take into account termination fees associated with the complex deal. And had the school district issued fixed-rate debt, Wall Street would not have received the cornucopia of fees embedded in the more complex deal.
While the expenses associated with more complex transactions vary depending on the terms of the deal, Denver offers an example of the additional costs they can impose. So far, Denver has paid about $9.7 million more in fees for its deal than it would have had it chosen a simpler transaction.
Joseph S. Fichera, chief executive of Saber Partners, a financial advisory firm that specializes in structured finance, said that the type of transaction pursued by the Denver schools was a false solution for what the issuers want to achieve — lower long-term costs — because the banks selling the deals rarely quantified all of the potential risks involved.
“The issuer made a simple financing highly complex and took on substantial risk without knowing how large its downside could be,” he said, referring to the Denver deal. “The advisers and bankers may have disclosed that there were risks, but apparently did not help the issuer truly understand them. They typically present economic outcomes to the issuer only on projected savings and assume away any chance of the risks happening.”
THE PROBLEM
$400 Million Gap
In a Pension Fund
The Denver public schools needed to do financial contortions because, like many other public agencies nationwide, its pension plan did not have enough funds to meet the payments due to retirees. And for years, the school system had not met its required annual pension payments to ensure a fully funded plan; by 2007, the school system faced a $400 million gap.
The school system solicited advice from several banks on how to handle this problem and ultimately decided to issue bonds that allowed it to refinance its existing debt of $300 million, which had a fixed interest rate. It also raised an additional $450 million, most of which went into the pension to fill the gap in that plan. Together, $750 million was raised using the riskier pension certificates.
The Denver certificates contained debt issues that had variable rates and were to be resold to investors in weekly auctions; the arrangement carried an annual interest rate of around 5 percent, not counting fees and costs associated with that type of debt. Fixed-rate debt would have cost 7.2 percent.
Denver schools had issued pension certificates before, but this time the banks added a little spice to the recipe: an interest-rate swap that made the variable debt mimic a fixed-rate instrument. If prevailing rates fell, the school system would have to make up the difference to the banks. But if interest rates rose, the swap would protect the school system from having to pay higher debt costs.
It was a heady brew, one that required an unusual amount of financial expertise to assess. In that regard, Denver had an apparent advantage: Mr. Bennet and Mr. Boasberg.
Unlike many school district officials, both men were financially sophisticated and had worked together in the private sector. Mr. Bennet handled investments and structured financial deals for the Anschutz Investment Company, a private concern owned by the billionaire Philip Anschutz that has stakes in telecommunications and oil. Mr. Boasberg, meanwhile, was a deal maker in mergers and acquisitions at Level 3 Communications, a telecommunications concern.
“We looked at what the risks were,” said Mr. Boasberg, who has been superintendent of the Denver public schools system since early 2009.
But according to several members of the board of education, the bankers’ presentations for the 2008 debt deal outlined its risks only in broad terms, discussing, for example, what would happen if interest rates shifted or the economy weakened a bit. The banks provided no full-blown worst-case situations to the board, focusing instead on the transaction’s upside: lower debt costs and a potential saving of $129 million in pension costs over the next 30 years.
School board members also said that bankers had not discussed problems in the variable-rate debt market that arose the previous year — a development that would have alerted them to troubles they might have had securing a manageable rate on the debt that they were refinancing.
Nor, they said, had the bankers discussed the outright collapse of trading in auction-rate securities, a $330 billion market that ran aground in mid-February 2008. Auction-rate securities are very similar to the variable-rate debt the Denver schools were considering at the time; both types of securities involve periodic auctions sponsored by financial institutions to determine what interest rates will be paid by the issuer.
Like the structural weaknesses in the variable-rate market, turmoil in the auction-rate market should have been a warning sign for the Denver school system and its financial stewards. But according to board members, its bankers and advisers never sent up warning flares of this sort.
“I think there was discussion around financial markets as a whole,” said Bruce Hoyt, a board member since 2003 and treasurer at the time the deal was done. “I don’t recall specific discussions about the freezing of auction-rate securities.”
In the end, Denver became ensnared in the financial maelstrom that was stirring even before it restructured its debt and that gathered force as the credit crisis deepened through the summer and fall of 2008. Prevailing interest rates collapsed, and the market for the Denver public school system’s debt shrank markedly.
Denver’s funding costs rose further when Dexia, a Franco-Belgian company that had facilitated the transaction and insured the pension certificates, ran into trouble. Worried about Dexia’s financial position, investors fled any securities the company had insured, including Denver’s debt.
In the end, a deal that JPMorgan said would have an interest rate of around 5 percent spiked to 8.59 percent during its first fiscal year, and has since settled down to an average rate of 7.12 percent today.
THE MISSTEP
Locked In for Years
As a Deal Sours
Financial advisers say that deals like Denver’s might work for some issuers. But they say that their complexity can mask the fact that they often require issuers to give up far more than they get in return.
Like a homeowner, Denver essentially started out with the equivalent of a standard, fixed-rate mortgage that allowed it to refinance if interest rates fell. But the 2008 deal gave that up for the equivalent of a 30-year loan with a lower rate but significant penalties and costs if investor interest in the debt declined, as it did once the credit crisis kicked in.
Moreover, refinancing was extremely costly, given the hefty termination fees.
While such deals have become common in public finance circles, they are rare in the private sector. If corporations issue such debt, they will typically limit their terms to five years, which gives them room to maneuver as economic circumstances evolve.
Agreeing to be locked into a 30-year contract, as public entities have done, is especially costly because getting out of it requires paying penalties to the banks for every remaining year of the transaction.
Andrew Kalotay, founder of Andrew Kalotay Associates, a debt management advisory firm, said a deal like Denver’s would be highly unusual among private sector issuers like corporations because they recognized the pitfalls of locking themselves into an arrangement for 30 years.
“I’m not aware of any corporations trying to get a better fixed rate” by issuing long-term instruments such as those used by Denver. “Why would the school district want to do this transaction with all the attendant risks of mispricing and the possibility of unfavorable unwind costs when they could have done a conventional, taxable fixed-rate deal?” he asked.
Bankers, however, love these deals. In addition to the enormous termination fees they can snare, bankers also get remarketing fees and swap advisory fees.
Termination fees, however, top them all. Like the punishing prepayment penalties some homeowners have to come up with when paying off a mortgage early, termination fees on deals like Denver’s are essentially charges levied to rewrite the terms of a contract.
To some issuers, termination fees feel easier to swallow if they pay for it by issuing yet another round of debt, like a consumer using one credit card to pay the penalty charges on another. But even though no upfront cash is paid out, yet another layer of debt is incurred, adding to the cost of getting out of the deals.
Denver is considering paying its termination fees in this fashion, Mr. Boasberg said. It was unclear what the interest rate would be on the new debt, but he maintained that the school system would unwind the transactions only if it were economical and the interest rate on the debt were low enough to offset the termination fees.
Had Denver issued a standard, fixed-rate bond in 2008, it would not be facing termination fees now. While it is possible that the annual costs of the Denver deal will come down in the future, they are now roughly in line with what the school system would have paid in a fixed-rate transaction.
Jeannie Kaplan, a board of education member for almost five years, supported the 2008 deal but now regrets it because of its costs and complexity. “Bennet and Boasberg had been presented as financial saviors of the Denver school system, and I sat there wanting to believe what they were saying,” she said. “The board probably should have had their own financial consultant.”
Mr. Boasberg said critics of the deal were politically motivated, pointing to the close primary runoff pitting Mr. Bennet, the former superintendent, against Andrew Romanoff, another Democrat, for a place on the ballot for the Senate in the November elections. But Ms. Kaplan said she started questioning the deal before Mr. Bennet was appointed to the Senate in early 2009.
The school system’s 2008 refinancing is one of several issues that have come up in the runoff, including campaign financing, general integrity issues and Washington effectiveness.
Mr. Bennet became superintendent of the Denver schools in 2005 after he left the Anschutz organization to work for the mayor of Denver, John Hickenlooper.
From the campaign trail in mid-July, Mr. Bennet reiterated his support of the deal, saying that it had achieved the school system’s goal of improving its cash flow and merging with Colorado’s Public Employees’ Retirement Association, which meant the schools no longer had to pay 8.5 percent interest on its annual pension shortfall.
“Despite going through the worst recession since the Great Depression, we did that,” he said in a statement.
THE RESULTS
Another Shortfall,
And Cloudy Future
As Denver weighs its refinancing problems, it faces another conundrum: the money the city raised to shore up its pension fund has turned out to be inadequate because of the stock market’s plunge.
The fund turned in a dismal performance in the credit crisis — as was the case with most such funds — losing almost twice the $400 million borrowed by the school district to plug the pension gap. As a result, the school system’s pension shortfall recently stood at around $386 million, only slightly lower than it was two years ago, and even though $400 million had been funneled into it in 2008.
While the pension’s merger with the state system allows Denver’s school system to avoid paying interest on shortfalls, that benefit is temporary. If a shortfall still exists in 2015, the merger requires that it be closed.
Mr. Boasberg maintains that the deal has allowed Denver to hire teachers while other school districts are cutting back. But Henry Roman, president of the Denver Classroom Teachers Association, said that fewer teachers had been hired this year than in previous years.
Some board of education members fear that the human costs of Denver’s exotic refinancing deal are yet to be fully realized — and when they are, it will be in classrooms.
Ms. Kaplan says she is particularly concerned about the impact of having to fund the Denver school’s pension plan fully in 2015 if investment losses have not been recouped by then.
“How is that going to affect kids and teachers and classrooms?” she asked. “It makes it difficult for board members to do a budget now.”
It’s no secret that I admire Gretchen Morgenson of the New York Times. Her articles have penetrated deeper and deeper into the realities and logistics of the Great Financial Meltdown. But she continues to drag myth alongside of reality. True, it is difficult to get your mind around the idea that Wall Street managers WANTED bad mortgages, but that simple piece of truth is unavoidable. In the article below she draws ever nearer to this truth, saying that the real question is “what did they know and when did they know it?”She even spots the extremely important fact that the worse the loan the more money was made by Wall Street. My objection is why not ask the next obvious question, to wit: “If Wall Street’s profits went up as the quality of mortgages went down, isn’t the obvious incentive to create increasingly bad paper?” And in what world has Wall Street ever done anything to diminish profits on moral grounds?But her spotting is defective. She sees a 5 point spread (Yield Spread Premium) between what was paid for the loans and the price charged to investors. She correctly points out that the most Wall Street usually gets on trades like this is around 2 points. But think about it. Could such a small spread actually account for the ensuing mayhem that resulted?What she fails to point out is the actual logistics. Investors, and for that matter, even the rating agencies, were never given the actual loans to look at and kick the tires. They were given descriptions of the loans which were incorporated into a narrative that portrayed the loans in a much better light than anything a loan underwriter would agree with. The final description of the loans was so loaded with misrepresentations that even a small amount of due diligence would have revealed major discrepancies that would have stopped this money machine from operating, for good.Gretchen’s error is reflected in most articles by journalists and government officials. They all miss a major part of the transaction. Do the math. How could a five point spread account for the actual 8-10 point spread that was used to massage the description of the pool? There is a whole other SIV transaction that everyone is ignoring. The size of it will astonish you.
“WHAT did they know, and when did they know it?” Those are questions investigators invariably ask when trying to determine who’s responsible for an offense or a misdeed.
But for the Wall Street banks whose financing of the subprime mortgage machine placed them at the center of the credit crisis, it’s becoming clear that a third, equally important question must be asked: “What did they do once they knew what they knew?”
As investigators delve deeper into the mortgage mess, they are finding in too many cases that Wall Street firms did nothing when they learned about problem loans or improprieties in lending. Rather than stopping practices of profligate originators like New Century, Fremont and Ameriquest, Wall Street financiers, which held the purse strings for these companies, apparently decided to simply look the other way.
Recent cases have provided glimpses of this conduct. Last week, the Financial Industry Regulatory Authority accused Deutsche Bank Securities, a unit of the huge German bank, of misleading investors about how many delinquent loans went into six mortgage securities worth $2.2 billion that the firm underwrote. Deutsche Bank underreported the delinquency rates among loans when it created the securities in 2006, Finra contends, and then sold them to investors.
Deutsche Bank also understated historical delinquency rates in 16 subprime securities it packaged in 2007, Finra said. Even after it discovered the errors, the authority added, Deutsche Bank continued to report the misstated figures on its Web site, where investors checked the performance of past mortgage pools.
Deutsche Bank settled without admitting or denying the allegations; it paid $7.5 million. The firm said Friday that it had cooperated and was pleased to have the matter behind it.
James S. Shorris, acting chief of enforcement at Finra, said that this was just the first of such cases and that he oversees a team of more than a dozen people investigating firms involved in mortgage securities.
While the Finra case showed Deutsche Bank failing to report problem loans in its securities, investigators in other matters are learning that some firms used information about lending misconduct to increase their profits from the securitization game — without telling investors, of course.
Here is what investigators have learned, according to two people briefed on the inquiries who spoke anonymously because they were not authorized to discuss them publicly. The large banks that provided money to mortgage originators during the mania hired outside analytics firms to conduct due diligence on the loans that Wall Street bought, bundled into securities and sold to investors.
These analysts looked for loans that failed to meet underwriting standards. Among the flagged loans were those in which appraisals seemed fishy or the mortgages went to borrowers with credit scores far below acceptable levels. Loans on vacation properties erroneously identified as primary residences were also highlighted.
The analysts would take their findings back to the Wall Street firms packaging the securities; the reports were not made available to investors.
In 2006-07, amid the mortgage craze, more loans didn’t meet the criteria. But instead of requiring lenders to replace these funky mortgages with proper loans, Wall Street firms kept funneling the junk into securities and selling them to investors, investigators have found.
Cases brought against Wall Street firms by Martha Coakley, attorney general of Massachusetts, have brought some of these practices to light. “Our focus has been on the borrower,” she said in an interview last week, “but as we’ve peeled back the onion we’ve gotten the picture of the role Wall Street played through the financing of these loans.”
But some on Wall Street went further than simply peddling loans they knew were bad, according to the people briefed on some investigators’ findings. They say the firms used these so-called scratch-and-dent loans to increase their profits in the securitization process.
When due-diligence reports turned up large numbers of defective loans — known as exceptions — the banks used this information to negotiate a lower price on the mortgages they bought from the original lenders.
So, instead of paying 99 cents on the dollar for the problem loans, the firm would force the lender to accept 97 cents or perhaps less. But the firm would still sell the mortgage pool to investors at 102 cents or higher, as was typical on high-quality loan pools.
Wall Street enjoyed the profits these practices generated. And because lenders were financed by the Wall Street firms bundling the mortgages into securities, they were hesitant to reject too many dubious loans because doing so would slow the securitization machine.
FOR their part, Wall Street loan packagers were loath to imperil their relationship with lenders like New Century; as long as Wall Street’s lucrative mortgage factories were humming, it needed loans to stoke them. Forcing New Century to eat its bad loans might prompt it to take its business elsewhere.
The bottom line: the more problematic the loans, the better the bargaining power and the higher the profits for Wall Street.
To be sure, the securities’ offering statements noted, in legalese, that the deals might contain “underwriting exceptions” and those exceptions could be “material.” But as investigators get closer to understanding how Wall Street used these exceptions to jack up its earnings, that disclosure defense may ring hollow.
Investors are starting to wake up. First, they are filing suit in any court of competent jurisdiction alleging fraud in the sale of mortgage-backed securities. As discovery proceeds, they will also discover that despite assurances to the contrary not all of the money they advanced was used for the purchase of mortgage loans. In discovery, they will find that a substantial percentage of the money they advanced (by purchasing mortgage-backed securities) was used for fees and profits that were undisclosed to both the investors and the borrowers.
It seems that they’re finding a friendlier reception in state courts. As these investors suits multiply, it will have a dramatic affect on the way state judges view securitized mortgage loans. The allegations of fraud by institutional investors carries far more weight than an individual borrower making the same claims.
Borrowers and the attorneys who represent them would do well to track these cases carefully. I would ask that as you do so, you send copies to me at NGarfield@MSN.com. You will learn a great deal just by reading the complaints. You will learn even more if you keep track of the discovery proceedings in those cases. State judges that are presented with these claims will probably start issuing orders allowing the investors to proceed and discovery. Both the judges and the orders they issue should be tracked.
INVESTORS who lost billions on boatloads of faulty mortgage securities have had a hard time holding Wall Street accountable for selling the things in the first place.
For the most part, banks have said they can’t be called out in court on any of this because they had no idea that so many of these loans went to people who lacked the resources to make even their first mortgage payment.
Wall Street firms were intimately involved in the financing, bundling and sales of these loans, so their Sergeant Schultz defense rings hollow. They provided hundreds of millions of dollars in credit to dubious underwriters, and some even had their own people on site at the loan factories. Many Wall Street firms owned mortgage lenders outright.
Because many of the worst lenders are now out of business, investors in search of recoveries have turned to the banks that packaged the loans into securities. But successfully arguing that Wall Street aided lenders in a fraud is tough under federal securities laws. This is largely a result of Supreme Court decisions barring investors from bringing federal securities fraud cases that accuse underwriters and other third parties as enablers.
Where there’s a will, however, there’s a way. And state courts are proving to be a more fruitful place for mortgage investors seeking redress, legal experts say.
In late June, for example, Martha Coakley, the attorney general of Massachusetts, extracted $102 million from Morgan Stanley in a case involving Morgan’s extensive financing of loans made by New Century, a notorious and now defunct lender that was based in California.
Morgan packaged the loans into securities and sold them to clients, even after its due diligence uncovered problems with the underlying mortgages that New Century fed to the firm, Ms. Coakley said. In settling the matter, Morgan neither admitted nor denied the allegations. Her investigation is continuing.
One of the most interesting aspects of this case “is the active role of state regulators relying upon state law to protect investors,” said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels in New York. “This state focus may well fill a void left by the U.S. Supreme Court’s increasingly narrow interpretation of the antifraud provisions of the federal securities laws as well as the relatively few S.E.C. enforcement actions initiated in this area.”
Last Friday, an investment management firm that lost $1.2 billion in mortgage securities it bought for clients filed suit in Massachusetts state court against 15 banks, accusing them of abetting a fraud. The firm, Cambridge Place Investment Management of Concord, Mass., purchased $2 billion in mortgage securities from the banks, and it says the banks misrepresented the risks in the underlying loans — both in prospectuses and sales pitches.
The complaint says the banks misled Cambridge Place by maintaining that the mortgages in the securities it bought had met strict underwriting requirements related to the borrowers’ ability to repay the loans. Cambridge also contends it relied on the banks’ claims of having conducted due diligence to verify the quality of the loans bundled into the securities.
The complaint also details the anything-goes lending practices during the subprime mortgage boom.
Interviews in the complaint with 63 confidential witnesses turned up such gems as Fremont Investment & Loan, which had been based in California, approving loans for pizza delivery men with reported monthly incomes of $6,000, and management at Long Beach Mortgage, also in California, directing underwriters to “approve, approve, approve.”
One Long Beach program made loans to self-employed borrowers based on three letters of reference from past employers. A former worker said some letters amounted to “So-and-so cuts my lawn and does a good job,” adding that the company made no attempt to verify the information, the complaint stated.
Such tales are hardly shockers. But they provide important context when Cambridge moves up the ladder to the banks that bundled and sold the loans.
For example, the complaint contended that Credit Suisse, from whom it bought $88 million of mortgage securities in 2005 and 2006, told Cambridge of its “superior” due diligence, including a performance review of every loan. Three-quarters of these loans are delinquent, in default, foreclosure, bankruptcy or repossession, the complaint said.
Bear Stearns, now a unit of JPMorgan Chase, sold Cambridge $65 million of securities. It owned three mortgage lenders and told Cambridge it sampled the loans it sold to check underwriting procedures, borrower documentation and compliance, the complaint said.
Among others named in the suit are Bank of America, Barclays, Citigroup, Countrywide, Deutsche Bank, Goldman Sachs, Merrill Lynch, Morgan Stanley and UBS. All of those, as well as Credit Suisse and JPMorgan, declined to comment.
CAMBRIDGE’S lawyers brought its case in Massachusetts under laws barring those who sell securities from making false statements about them or omitting material facts. Jerry Silk, a senior partner at Bernstein Litowitz Berger & Grossmann who represents Cambridge, said, “This case represents yet another example of Wall Street banks’ failure to live up to their basic responsibility to investors — to tell the truth about the securities they are selling.”
Mr. Silk’s firm has jousted with Wall Street underwriters before. In 2004, it recovered $6 billion in a suit against banks that underwrote debt issued by WorldCom, the defunct telecom. Denise L. Cote, the federal judge overseeing that matter, concluded that because investors rely so heavily on underwriters, courts must be “particularly scrupulous in examining the conduct,” she said.
It is too soon to tell if investors will recover losses in mortgage securities. But the efforts are reminiscent of those in the mid-90s against brokerage firms that cleared trades and provided capital to dubious penny-stock outfits such as A. R. Baron and Sterling Foster.
For decades, companies that cleared such trades — Bear Stearns was a big one — escaped liability for fraud at these so-called “bucket shops.” But regulators went after clearing firms by accusing them of facilitating such acts; in a 1999 lawsuit, the Securities & Exchange Commission accused Bear Stearns of enabling a fraud at A. R. Baron. Bear Stearns paid $35 million in fines and restitution to settle the case.
If trust in capital markets is to return, investors must be able to believe what they read in prospectuses. Without that minimum standard, how can Wall Street expect the markets to function again?
Editor’s Note: While the courts hear arguments and decide this way and that about standing and real party in interest, the elephant in the living room is that we have highly publicized reports of LOSSES associated with more than $5 trillion in loans bought or guaranteed by Fannie and Freddie. That amounts to around 25 million loans more or less. So I ask myself, “Self, if those loans were bought or guaranteed by Freddie or Fannie, what’s left?”
If they were bought, did they keep them or sell them into the secondary market for securitization?
If they own them, why are they not at least nominal plaintiffs or beneficiaries in foreclosure sales?
If they guaranteed them, and they show a loss, doesn’t that mean they paid?
If they paid, it was presumably the loss or full balance of the loan, so which is it?
If they paid, what did they get in return?
If they paid, who owns the loan now?
If they report an “inventory” of foreclosed property, who actually is named as the owner and who gets the proceeds of sale?
If property is “inventory” were Freddie and Fannie involved on any level of the foreclosure or sale?
Did Freddie or Fannie get the benefit of any credit enhancements, insurance, credit default swaps etc.?
Who makes modification decisions for Fannie and Freddie?
Do some or all of these loans fall under the category of unsecured debt, the enforcement of which is subject to pennies on the dollar debt collection?
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May 10, 2010, 4:46 am
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From Gretchen Morgenson’s latest Fair Game column:
If you blinked, you might have missed the ugly first-quarter report last week from Freddie Mac, the mortgage finance giant that, along with its sister Fannie Mae, soldiers on as one of the financial world’s biggest wards of the state.
Freddie — already propped up with $52 billion in taxpayer funds used to rescue the company from its own mistakes — recorded a loss of $6.7 billion and said it would require an additional $10.6 billion from taxpayers to shore up its financial position.
The news caused nary a ripple in the placid Washington scene. Perhaps that’s because many lawmakers, especially those who once assured us that Fannie and Freddie would never cost taxpayers a dime, hope that their constituents don’t notice the burgeoning money pit these mortgage monsters represent. Some $130 billion in federal money had already been larded on both companies before Freddie’s latest request.
But taxpayers should examine Freddie’s first-quarter numbers not only because the losses are our responsibility. Since they also include details on Freddie’s delinquent mortgages, the company’s sales of foreclosed properties and losses on those sales, the results provide a telling snapshot of the current state of the housing market.
That picture isn’t pretty. Serious delinquencies in Freddie’s single-family conventional loan portfolio — those more than 90 days late — came in at 4.13 percent, up from 2.41 percent for the period a year earlier. Delinquencies in the company’s Alt-A book, one step up from subprime loans, totaled 12.84 percent, while delinquencies on interest-only mortgages were 18.5 percent. Delinquencies on its small portfolio of option-adjustable rate loans totaled 19.8 percent.
The company’s inventory of foreclosed properties rose from 29,145 units at the end of March 2009 to almost 54,000 units this year. Perhaps most troubling, Freddie’s nonperforming assets almost doubled, rising to $115 billion from $62 billion.
When Freddie sells properties, either before or after foreclosure, it generates losses of 39 percent, on average.
There is a bright spot: new delinquencies were fewer in number than in the quarter ended Dec. 31.
Freddie Mac said the main reason for its disastrous quarter was an accounting change that required it to bring back onto its books $1.5 trillion in assets and liabilities that it had been keeping off of its balance sheet.
None of the grim numbers at Freddie are surprising, really, given that it and Fannie have pretty much been the only games in town of late for anyone interested in getting a mortgage. The problem for taxpayers, of course, is that the company’s future doesn’t look much different from its recent past.
Indeed, Freddie warned that its credit losses were likely to continue rising throughout 2010. Among the reasons for this dour outlook was the substantial number of borrowers in Freddie’s portfolio that currently owe more on their mortgages than their homes are worth.
Even as its business suffers through a sour real estate market, Freddie must pay hefty cash dividends on the preferred stock the government holds. After it receives the additional $10.6 billion it needs from taxpayers, dividends owed to Treasury will total $6.2 billion a year. This amount, the company said, “exceeds our annual historical earnings in most periods.”
In spite of these difficulties, Freddie and Fannie are nowhere to be seen in the various financial reform efforts under discussion on Capitol Hill. Timothy F. Geithner, the Treasury secretary, offered a vague comment to Congress last March, that after some unspecified reform effort someday in the future, the companies “will not exist in the same form as they did in the past.”
Fannie and Freddie, lest you’ve forgotten, have been longstanding kingpins in the housing market, buying mortgages from banks that issue them so the banks could turn around and lend even more. After both companies overindulged in the lucrative but riskier end of home loans, they nearly collapsed, prompting the federal rescue. Since then, the government has continued to use the firms as mortgage buyers of last resort, to help stabilize a housing market that is still deeply troubled.
To some, the current silence on what to do about Freddie and Fannie is deafening — as is the lack of chatter about Freddie’s disastrous report last week.
“I don’t understand why people are not talking about it,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington, referring to Freddie’s losses. “It seems to me the most fundamental question is, have they on an ongoing basis been paying too much for loans even since they went into conservatorship?”
Michael L. Cosgrove, a Freddie spokesman, declined to discuss what the company pays for the mortgages it buys. “We are supporting the market by providing liquidity,” he said. “And we have longstanding relationships with all the major mortgage lenders across the country. We’re in the business of buying loans, and we are one of the few sources of liquidity available.”
But Mr. Baker’s question gets to the heart of the conflicting roles that Freddie and Fannie are being asked to play today. On the one hand, the companies are charged with supporting the mortgage market by buying loans from banks and other lenders. At the same time, they must work to minimize credit losses to make sure the billions that taxpayers have poured into the firms don’t disappear.
Freddie acknowledged these dueling goals in its quarterly report. “Certain changes to our business objectives and strategies are designed to provide support for the mortgage market in a manner that serves our public mission and other nonfinancial objectives, but may not contribute to profitability,” it noted. Freddie said that its regulator, the Federal Housing Finance Agency, has advised it that “minimizing our credit losses is our central goal and that we will be limited to continuing our existing core business activities and taking actions necessary to advance the goals of the conservatorship.”
Mr. Baker’s concern that Freddie may be racking up losses by overpaying for mortgages derives from his suspicion that the government might be encouraging it to do so as a way to bolster the operations of mortgage lenders.
That would make Fannie’s and Freddie’s mortgage-buying yet another backdoor bailout of the nation’s banks, Mr. Baker said, and could explain the government’s reluctance to include them in the reform efforts now being so hotly debated in Washington.
“If they are deliberately paying too much for mortgages to support the banks,” Mr. Baker said, “the government wants them to be in a position to keep doing that, and that would mean not doing anything about their status until further down the road.”
It’s no surprise that the government doesn’t want to acknowledge the soaring taxpayer costs associated with these mortgage zombies. The truth about Fannie and Freddie has always been hard to come by in Washington, and huge piles of money seem to circulate silently around both firms.
Remember last Christmas Eve? That’s when the Treasury quietly decided to remove the $400 billion limit on federal borrowings available to Fannie and Freddie through 2012.
That stealth move didn’t engender much confidence in either the companies or their government guardian.
But because taxpayers own Freddie and Fannie, we should know more about their buying habits, as Mr. Baker points out. Unfortunately, if the government’s past actions are any indication of what we can expect, then don’t hold your breath waiting for the facts.
Go to Column from The New York Times »
Go to Freddie Mac Quarterly Report »
As a citizen, please start asking tougher questions and demanding truthful answers of your elected officials. We MUST hold these men and women accountable to representing ‘we the people’ instead of their lobby pals.
Whatever you hear from the Administration or any of the large institutions via the drive-by media you can assume that it’s a lie or many shades of gray with dash or two of spin. Why? Well, of course, the truth is not going to get votes for politicians or more investors and account holders for any of these characters who operate in the shadows of financial institution corporate offices across America.
Let me give you a dose of truth serum in case you’re tempted to believe the drive by media reports on the foreclosures and the Making Home Affordable plan we’ve been told is going to rescue our economy and the housing market and the millions of families jobless and now facing foreclosure. You ready?
Here it is: the loan servicers don’t care about anything but money and the modus operandi is clear… foreclose as fast as possible on everyone in a mortgage hardship. Just modify enough loans to make everyone think we’re really on board with this. Make excuses for everything else. Lie to media about what’s really going on because mostly everyone believes what they hear anyway.
A deeper look into the numbers and statistics will leave you scratching your head though – and asking yourself the question, “but why?”
According to an article by Gretchen Morgenson from the New York Times, “Alan M. White, an assistant professor at the Valparaiso University law school in Indiana, analyzed data on 3.5 million subprime and alt-A mortgages in securitization pools overseen by Wells Fargo. The loans were written in 2005 through 2007; data on their performance is provided to the trusts’ investors. Mortgages handled by five of the nation’s largest loan servicing companies — Bank of America, Chase Home Finance and Litton Loan Servicing among them — are contained in the Wells Fargo data.
Mr. White found that mortgage modifications peaked in February and have declined in all but one month since. While servicers modified 23,749 loans in these trusts in February, they changed only 19,041 in May and 18,179 in June. This is exactly when servicers were supposed to be responding to the government’s loan modification urgings.
Foreclosures, meanwhile, keep rising. In June, 281,560 were in process, slightly above the 277,847 in May. Last January, there were about 242,000 foreclosures in the pipeline among the Wells Fargo trusts.”
Well, isn’t that interesting. You see, the numbers simply don’t lie. They tell the truth and expose the raw data of what is really happening. The report continues, “the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.”
Did you catch that? The AVERAGE loss on a house that a servicers takes to foreclosure sale is a whopping 64.7% of the original loan balance!!!! The average loan amount was $223,000. But in the liquidation sale, the property sold for $144,000 less, or a $79,000 sales price on average.
So any logical person goes, “why? Why would a servicer foreclose on the home instead of providing a loan modification for a homeowner who wants to pay but just needs a reduction in that payment?” I know I can’t be the only one who’s wondered that…
If you want to find the answer you just gotta follow the money… it’s that simple. And the answer does not shed any more favorable light on these servicers – who, by the way, are just subsidiaries of the main financial institutions. Example: Citimortgage is the servicer. They are owned by Citigroup. America’s Servicing Company is the servicer. They are owned by Wells Fargo.
So back to following the money. First, the pooling and servicing agreements governing these trusts, servicers and trustees usually contain “default servicing provisions” which provide the servicer which much higher fees when the loan goes into default. Then the servicer also gets all sorts of other fees reimbursed to them upon a liquidation sale such as BPO fees, inspection fees, legal fees, etc. These fees may get paid to the servicer right away but may not be reimbursed until the sale goes through. But, here’s the BIG reason…
Very often, if not most of the times, these servicers were paid in full for all these loans when they acted as the sponsor and sold the Notes (assets) to these trusts. The trust investors put up a lump sum amount to the servicer and the servicer agreed to collect the monies, manage the escrow accounts and in turn, made a guarantee of cash flow payments to the trust each month. The trust investors are most worried about one thing… their monthly payment on the cash flow. If they keep getting their monthly cash payment, do you think they’re going to be screaming bloody murder? Probably not. As long as the check keeps coming, I got no qualms. Stop the checks and I’m going to be gettin’ all in your business. Think about it… haven’t you noticed a peculiar lack of lawsuits being filed by MBS trust investors or the trusts themselves? One would think the federal courts would be littered with lawsuits by these trusts against all the institutions in the securitization chain for all sorts of allegations regarding the massive losses you’d think they’re realizing due to the defaults.
So, to keep the investors out of their “business” the servicer has to figure out a way to keep those cash flow payments going. Well, let’s say I’m servicing a pool of 1000 loans and the monthly cash flow on that pool is $1 million (or $1000 per loan average). But my default rate starts rising and now 10% of these loans are not paying. Well, that’s $100,000 per month less that I’m getting as the servicer. Shoot, how do I keep making the payment of $1 million per month if I’m only receiving $900,000?
Oh, I got it! If I can foreclose on a couple homes in default, take a 64.7% loss on it but I still get $79,000 in one lump sum from each home I liquidate, I can keep making that cash payment to the trust. All I need to do is liquidate about 1.2 homes per month on average, and, even though I take a huge loss on these homes, I can keep making that cash flow payment to the trust, keep my investors happy and better yet, keep them out of my business and away from asking all sorts of questions I really don’t want to answer. Note: this game can only carry on for so long. At some point the pied piper is going to pipe…
This my best stab at a simplified answer to “why” these servicers are ignoring the Making Home Affordable program and foreclosing as fast as they possibly can. Nothing else makes sense to me. If you have any other input, I’d love to hear about in the forum on this topic.
The kicker here is that these servicers don’t have legal standing to foreclose. They don’t own the Note in 80%+ of the cases – and that number is probably higher than 90% of the time. So they unlawfully seize a family’s home, sell it even though they don’t own it and in the process they also violate the servicing agreements they are governed by. These agreements mandate that the servicer act in a fiduciary manner with respect to the interests of the investors. I can tell you unequivocally that taking an average 64.7% loss on a trust asset is worse for the trust versus modifying the loan at a higher amount (still with principal reduction for the borrower) and recapturing the interest. There is NO WAY the current servicer model of foreclose and liquidate passes the NPV test for these trust assets – at least as far as I can see.
For reference and further context, here is the article written by Gretchen Morgenson at the New York Times.
So Many Foreclosures, So Little Logic
By GRETCHEN MORGENSON
LAST week, the stock market tumbled on news that housing foreclosures and delinquencies rose again in the first quarter. The Office of the Comptroller of the Currency said that among the 34 million loans it tracks, foreclosures in progress rose 22 percent, to 844,389. That figure was 73 percent higher than in the same period last year.
But the comptroller’s office also said that amid the gloom, there was promising data about loan modifications: they rose 55 percent in the quarter. That growth came on a very low base, of course, but the move encouraged John C. Dugan, head of the comptroller’s office.
“As the administration’s ‘Making Home Affordable’ program gains traction and helps offset the impact of this very difficult economic cycle,” he said in a statement, “we should continue to see progress in future reports.”
A glimpse of second-quarter mortgage data, however, indicates that the progress Mr. Dugan and his colleagues in Washington are hoping for may take longer to emerge — raising questions about whether policymakers and banks are moving quickly or intelligently enough on the foreclosure problem.
Foreclosures remain one of the great financial ills for the economy. The Bush administration largely overlooked foreclosures affecting average homeowners, focusing instead on propping up elite, troubled financial institutions with taxpayer funds. The Obama administration has said it wants to wrestle the foreclosure issue to the ground by encouraging mortgage loan modifications, but its efforts have gotten little traction.
Loan modifications occur when a lender agrees to change terms of a troubled borrower’s mortgage; the most common approach is to reduce the loan’s interest rate. Cutting the amount of principal owed — an option that could be of more help to a borrower — is rare because it means homeowners pay less money back to the bank over time.
Lenders and their representatives, however, don’t like to modify loans through interest rate cuts or principal reductions because, of course, it reduces the income they receive from borrowers. No surprise, then, that loan modifications have been a trickle amid the recent foreclosure flood.
Enter the government, with the program it announced in March to encourage modifications. It offers incentives to loan servicers to change mortgage terms, providing $1,000 for each loan they modify. The program focuses on making payments more affordable through lower interest rates, but delinquent amounts and late fees are typically tacked onto the mortgage balance. “Making Home Affordable” does not compel lenders to reduce mortgage balances.
Servicers signed on to the program in April. The program’s early months were not covered by the O.C.C.’s first-quarter report. But other figures on modifications conducted in April, May and June are available. And they show a decline in modifications, not an increase as the government hoped.
Alan M. White, an assistant professor at the Valparaiso University law school in Indiana, analyzed data on 3.5 million subprime and alt-A mortgages in securitization pools overseen by Wells Fargo. The loans were written in 2005 through 2007; data on their performance is provided to the trusts’ investors. Mortgages handled by five of the nation’s largest loan servicing companies — Bank of America, Chase Home Finance and Litton Loan Servicing among them — are contained in the Wells Fargo data.
Mr. White found that mortgage modifications peaked in February and have declined in all but one month since. While servicers modified 23,749 loans in these trusts in February, they changed only 19,041 in May and 18,179 in June. This is exactly when servicers were supposed to be responding to the government’s loan modification urgings.
Foreclosures, meanwhile, keep rising. In June, 281,560 were in process, slightly above the 277,847 in May. Last January, there were about 242,000 foreclosures in the pipeline among the Wells Fargo trusts.
“I was hoping we would see some impact in June of the government’s program,” Mr. White said. “Is ‘Home Affordable’ working? My short answer is no.”
To be sure, the government’s data differs from that which Mr. White analyzed, and its loan modification figures for the second quarter may look better as a result. The O.C.C. includes prime loans as well as subprime, for example, while the Wells Fargo data contains no prime loans.
Nevertheless, Mr. White has collected the figures since November 2008, and he said that in the months since, the performance of the 3.5 million mortgages that he analyzes tracked the O.C.C. data pretty closely.
THE Wells Fargo data is illuminating. It shows that in June, 58 percent of modifications cut the payments that the borrower has to pay, a slightly smaller percentage than in April or May. The average reduction in June was $173 a month.
But the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.
Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. Perhaps no other single figure shows how wildly the mortgage mania pumped up home prices. It also bodes poorly for the quality of the mortgage-related assets lurking in banks’ books.
Loss severities, like foreclosures, are rising. In November, losses averaged 56.1 percent of the original loan balance; in February, 63.3 percent.
Given losses like these, Mr. White said he was perplexed that lenders and their representatives were resisting reducing principal when they modify loans. His data shows how rare it is for lenders to reduce principal. In June, for example, 3,135 loans — just 17.2 percent of the total modified — involved write-downs of principal, interest or fees. The total loss from these write-downs was just $45 million in June.
And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. “There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications,” Mr. White said. “That is not rational economic behavior.”
If banks have written down the value of these loans to the 40 cents on the dollar that they are fetching on foreclosures — the only true value for these homes right now — then why don’t they bite the bullet and reduce the loan amount outstanding for the troubled borrowers? That type of modification would be far more likely to succeed than larding a borrower who is hopelessly underwater with yet more arrears.
“You can reduce payments with a lot of gimmicks similar to those built into subprime loans — temporary rate reductions that defer a lot of principal, balloon payments,” Mr. White said. “To me that leads to a situation where American homeowners are paying 50 to 60 percent of their incomes for mortgages which reset in 2011 and 2012. That is not solving the problem.”
Certainly not for borrowers, that is. And because many of these losses will ultimately be passed on to taxpayers, it’s not solving our problem, either.
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